Norwegian banks are solid, but the financial system is vulnerable to high household debt and elevated property prices.
“High debt increases the risk of a tightening of household consumption in response to a substantial fall in house prices and a pronounced rise in the interest rate level. This is a source of financial vulnerability and could amplify an economic downturn. This could in turn lead to increased corporate loan losses for banks,” says Deputy Governor Jon Nicolaisen.
In conjunction with high debt levels, elevated property prices represent a source of financial vulnerability. Commercial property prices have risen since the financial crisis in pace with falling long-term rates. House prices rose rapidly in 2016, but since spring prices have edged down.
“Subdued house price inflation will curb household debt growth, but it will take time for vulnerabilities to recede. The correction in the housing market in 2017 may lower the risk of an abrupt and more pronounced decline further out,” says the Deputy Governor.
Stricter capital and liquidity requirements for banks following the financial crisis are the most important measures for addressing financial vulnerabilities. In addition, lending practice requirements for banks contribute to restraining the build-up of household vulnerabilities. The stress test in the 2017 Financial Stability Report shows that the largest banks would be resilient to a pronounced downturn in the Norwegian economy.
INCREASED RISK OF CYBERCRIME
Norway is at the forefront of developments in its use of digital financial services, particularly within payment services. Digitalisation can enhance efficiency, improve user-friendliness and result in new services, but it can also increase the risks associated with operational disruptions and cybercrime, which ultimately represent a threat to financial stability.
Norges Bank closely follows developments and will in consultation with Finanstilsynet assess possible risk-mitigating measures on a continuous basis. As the central bank, we also closely monitor the settlement of interbank payments at Norges Bank and the interbank systems under our supervision,” says the Deputy Governor.